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Why Activision Blizzard Is in a Realm of Its Own

Analyzing how Activision Blizzard dominates the market, and addressing its plans for the future.

My video game addiction began with an elegantly wrapped box 16 years ago on Christmas morning of 1997. Little did I know that this box would have such a profound impact on my life (and social skills, or lack thereof). Beginning with Nintendo 64, and later Dreamcast, PlayStation 2, Nintendo Wii and currently PlayStation 3, it's safe to say that video games have been a big part of my life. And this doesn't solely pertain to consoles -- Warcraft III and World of Warcraft, both played on PC, once dominated my life as well. It's clear the company that has had the most significant presence in my life is undoubtedly Activision Blizzard(NASDAQ: ATVI).

Prior to merging 2008, the two companies were completely separate gaming entities. Blizzard represented the dark hole that is PC gaming, where I would submerge myself into the various worlds (Warcraft, Starcraft, and Diablo) for unhealthy periods of time. Activision, on the other hand, represented the more socially acceptable video games I would play when friends came over, including such franchises as Call of Duty, Guitar Hero, and Tony Hawk.

Fast-forward five years later, and this union has become one of the most dominant names in gaming. Its first-quarter earnings indicate a 21% growth in EPS ($0.33 in Q1 2012, $0.40 in Q1 2013) and a 13% increase in net revenue ($1.172 billion in Q1 2012, $1.324 billion in Q1 2013). Arguably the company's most popular franchise, Call of Duty was featured twice among the 10 best-selling games of 2012, with Call of Duty: Black Ops 2 coming in at No. 1, and Call of Duty: Modern Warfare 3 at No. 8.

On the PC side of things, Activision Blizzard owns the online phenomena that is World of Warcraft, or WoW. Although the series has seen membership decrease over the years, this is to be expected with a game that is in its ninth year. Nonetheless, WoW still has 8.3 million subscribers, generating more than $100 million in revenue. Although subscriptions are slowly decreasing, Activision Blizzard has shown efforts to increase members with its most recent release of a WoW expansion pack, Mists of Pandaria, in September 2012,which sold a fairly impressive 2.7 million copies in its first week, aligning with the initial projections.

In terms of mobile presence, Activision Blizzard is actively pursuing the mobile platform in hopes of replicating the success that the company has seen in the console and PC space. The multiplatform franchise Skylanders, a video game that allows the gamer to purchase individual physical toys which can be linked to the virtual video game, can be played on PC, current-generation consoles, and iOS. Skylanders, the No. 1 franchise year to date in North America and Europe according to the Q1 2013 SEC filing, has earned revenue greater than $1 billion through 2012. Activision Blizzard has struck a deal with USAopoly to create a Skylanders-themed Monopoly game, one with Frito-Lay for a three-phase national promotion, and another with McDonald's, which launched a Happy Meal program in April earlier this year, and plans on extending the program to other countries throughout the year. If that wasn't enough, Activision has also secured licensees in the following categories: publishing, apparel, back-to-school, game accessories, costumes, construction sets, bedding, and party goods, according to a recent press release.

Source: Activision Blizzard.

In addition to developing its Skylanders franchise,Activision Blizzard plans on releasing Hearthstone: Heroes ofWarcraft, a cross-platform, free-to-play, digital, collectible card game for PC, Mac and iPad, in late 2013. With a 98% increase in net revenue generated by PC ($93 million in Q1 2013, $47 million in Q1 2012) according to its quarterly report, Activision Blizzard is expressing its continued desire to dominate the PC gaming experience.

Furthermore, Activision Blizzard is exhibiting its desire toward growth and video game progression. With the expected release of Call of Duty: Ghosts on November 5, and Diablo III in September on Playstation 3 and Xbox360 -- with plans for a PlayStation 4 release later --this company clearly has its sights on the future.

A few areas of concern for Activision Blizzard reside in the transition between gaming systems, the development of Call of Duty, and the increasing competition from Electronic Arts (NASDAQ:EA)and Disney (NYSE:DIS). Sales of CoD: Ghosts are not expected to be as high as its predecessor due to the transition between systems, from PS3 and Xbox 360 to PS4 and Xbox one, respectively. After E3 in early June, critics claimed that CoD: Ghosts doesn't demonstrate nearly enough advances in the game interface, and could suffer the effects of competing with EA's Battlefield 4, whose predecessor, Battlefield 3, rivaled CoD: Modern Warfare 3 in 2011. However, Modern Warfare 3 has outsold Battlefield 3 nearly 2-to-1, according to VGChartz. VGChartz also showed that Battlefield 4presale has outsold CoD: Ghosts presale by about 40,000 units as of June 29. Although this appears slightly daunting to the future of CoD, this sales differential can be partially attributed to the CoD faithful who are still exploring new maps in CoD: Black Ops II and haven't decided to preorder the newest release in the series. Although Battlefield may present viable competition, based off the sales of the prior releases in the series, it's safe to say that CoD will continue to control the market.

Disney has developed its very own knock-off of Skylanders that the company plans on releasing in August 2013. Disney Infinity, the rival product, uses physical toys that are then synthesized with the game, similar to Skylanders. The difference between the two, which could affect Skylanders, is that Disney Infinity uses characters from Disney and Pixar movies. This allows the gamer to interact with familiar characters from their favorite movies. A Disney Infinity Starter Pack is listed on gamestop.com for $74.99, the same price as a Skylanders: SWAP Force Starter Pack, clearly a pricing strategy by Disney. The area that investors should be watching this summer -- which positively affects Disney Infinity and, consequently, negatively affects Skylanders -- is the box office. DisneyInfinity's potential only increases with the success of Monsters University, which features one of the platform characters of Disney Infinity, Sully.While Disney Infinity shows great potential, the billion-dollar industry that is Skylanders may have already captured too much market share for Disney to have a significant impact. Only time will tell.

Although Disney and Electronic Arts present areas of concern for Activision Blizzard, due to its solid foundation, expansive fan base of lifelong gamers, and growth and expansion plans, this company is one that I see growing and prospering in the subsequent years. Activision's multiplatform business model makes for a company that is dependable and one that I, and Motley Fool One analyst Jason Moser, believe in. Just as my gaming will continue to grow in the subsequent years, so will Activision Blizzard's dominance of the market.

Fool intern Timothy Boyle has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard, McDonald's, and Walt Disney. The Motley Fool owns shares of Activision Blizzard, McDonald's, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.